The tide seems to be turning for Aditya Birla Nuvo (ABN), which underperformed on the bourses in the past five years. Its growth businesses, particularly financial services, insurance and telecom, were in the expansion phase and, thus, were consuming the cash flows generated by its traditional (value) businesses like textiles, garments, fertilisers, rayon, carbon black and insulators.
Analysts feel its growth businesses have achieved scale and are no longer dependent on the value businesses for funding. Says Girish Achhipalia, analyst, Morgan Stanley, in a report dated February 27, “Historically, the stock has traded at a steep discount, as value businesses have funded growth businesses. But this is unlikely to continue, as the latter is self-sufficient and have manageable balance sheets. We expect the discount to narrow.”
Though the stock has outperformed the Sensex over a year, valuations, at nine times the consolidated earnings of 2012-13, are still cheap. Analysts expect around 40 per cent upside from the current levels, based on their average target price of Rs 1,272. Even assuming the holding company discount usually given to such firms, the upside is still healthy from the current Rs 912.50.
How it weathered FY 12 storm
For the nine months ended December 2011, ABN’s performance was above expectations, despite a difficult macro economic scenario, particularly in the telecom, garments and fertiliser businesses. The performance would have been better, but for the eight per cent fall in profit in the December quarter, largely due to a rise in interest costs at Idea. On the whole, the company has strengthened its positioning in the financial services, telecom and fashion & lifestyle businesses. Says Rakesh Jain, managing director, “While some of the businesses did get affected due to sector-specific challenges, other businesses supported the overall earnings growth. This reflects the strength of its conglomerate model.”
The outlook for all businesses except insulators, carbon black and insurance is good. The macro environment for the insulator business continues to be tough, thanks to the problems engulfing the power sector. The carbon black business is also going through challenging times due to cheap Chinese imports, resulting in low capacity utilisation. Life insurance faces growth hurdles due to high operational costs on account of the dependence on an agency model and lack of a large bancassurance partner. Says Rohit Sanghavi, analyst, Prime Broking, “While manufacturing (value) businesses are expected to witness volume growth and margin expansion, market share gains and a stable pricing environment is positive for Idea Cellular. However, the financial services businesses (namely insurance and asset management) face short-term headwinds due to regulatory changes and investment climate.”
Money guzzlers now money spinners
ABN’s consolidated revenue is expected to grow at a compounded annual rate (CAGR) of 13 per cent over 210-14 but operating profit and net profit are expected to grow at a higher rate of 19-20 per cent, thanks to improved profitability of growth businesses. So, even as the share of growth businesses in consolidated revenue is expected to remain stable at around 65 per cent over the next few years, their contribution to profit (earnings before interest and tax or Ebit) is expected to jump significantly from 56 per cent (Achhipalia expects their share to jump by 900 basis points by 2013-14, mainly led by telecom.
Idea (ABN holds 25.4 per cent), the country’s third largest telecom service provider, with a subscriber base of 106.4 million, continued to gain revenue and market share in the first three quarters of 2011-12, as against a decline in the year-ago period. While revenue (Rs 14,144 crore) and operating profit (Rs 370 crore) in the first nine months of FY12 were up 26 per cent and 34 per cent year-on-year, respectively, net profit dropped 22 per cent to Rs 48 crore, thanks to higher interest costs on account of borrowings related to the 3G telecom spectrum roll out. However, the cash flow from operations turned positive in the December 2011 quarter. It should generate healthy flows from 2012-13 onwards, believe analysts.
|SUM OF THE PARTS
|Value of business in Rs cr
||Morgan Stanley *
|Total enterprise value
|Less: Net debt
|Net enterprise value
|Per share value (Rs )
|* BaseCase Source: Analyst reports
|KEY STATS OF BUSINESS SEGMENTS
|MS in Life Insurance FY11/FY12
|Ranking in AMC/MS
||5th / 9.1
||4th / 9
||4th / 8.9
|AB Fin. Book Size (Rs cr)/growth(%)
||1,975 / 77
||2,500 / 24
||2,750 / 86
|Idea's revenue MS in FY11/FY12
|Madura Garments' LTL growth (%)
|Source: Company MS: Market Share in % LTL: Like to Like
Says Jain, “Idea has a strong balance sheet to support future funding requirements, with consolidated net debt to equity at 1 and net debt to Ebitda (earnings before interest, taxes, depreciation and amortisation) at 2.6 times.” Even the insurance business (ranking is up from sixth to fourth) is unlikely to need fresh capital infusion for at least the next two years. This, with the already strong cash generation by value businesses, are expected to boost overall cash flow and help pare debt. Thus, the consolidated net debt to equity of 1.1 (FY11; excluding liabilities on policies in force) is expected to decline to 0.5 in the next three years (by 2013-14).
Says Achhipalia, “A combination of continuing strong growth across key business segments, strong free cash flow generation, debt repayment and improving return ratios are key catalysts to drive stock performance.”